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Yellen's Speech: How It Played on Precious Metals on June 27

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Part 4
Yellen's Speech: How It Played on Precious Metals on June 27 PART 4 OF 7

How the 1.1% Slump in the Dollar Buoyed Precious Metals

DXY fell 1.1%

The rise in precious metals on Tuesday, June 27, 2017, was also due to the slump in the US dollar. The US dollar index (or DXY), priced against a basket of six major world currencies, fell approximately 1.1% on Tuesday. The last five trading days have been bad for the index with it falling almost 1.4%. Gold and silver rose 0.26% and 1.0%, respectively, during that period.

The dollar hit its nine-month low against the euro after the ECB (European Central Bank) said it would begin reducing its emergency economic stimulus.

The fall in the US dollar makes dollar-denominated assets cheaper for investors in other countries. Thus the demand for the dollar and dollar-based assets rises as the dollar falls.

How the 1.1% Slump in the Dollar Buoyed Precious Metals

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Inverse relationship

The above graph shows the comparative price performance of gold and the DXY. We often see a close inverse relationship between the two since gold and other precious metals are all dollar-denominated assets. However, there are chances that the dollar and gold may move hand-in-hand during extreme risk conditions such as war. The US dollar and gold may both be considered safe-haven assets during extremely turbulent situations.

The correlation between gold (GLD) and the US dollar (UUP) is 21.0%, which means that about 21.0% of the time, an increase in the dollar will lead to a fall in gold, and vice versa.

The rise and fall of the dollar also play on mining stocks such as Agnico-Eagle Mines (AEM), Primero Mining (PPP), Barrick Gold (ABX), and Coeur Mining (CDE).

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